What is a "good" oil and gas lease royalty?

Many owners wonder what’s a “good” oil and gas lease royalty is. It depends on several factors, but in general you should be able to lease your oil and gas mineral rights for between 17% and 25%.

Analysis below the fold.

Analysis

More specifically for leases effective as 2019 in…

  • Colorado, most leases royalties range from 16.67% (25th percentile) and 20% (75th percentile) with a median of 18.75%.
  • Louisiana, most leases royalties range from 20% (25th percentile) and 20% (75th percentile) with a median of 20% (nice tight band there!)
  • North Dakota, most leases royalties range from 18% (25th percentile) and 20% (75th percentile) with a median of 19%.
  • New Mexico, most leases royalties range from 20% (25th percentile) and 25% (75th percentile) with a median of 25%.
  • Texas, most leases royalties range from 18.75% (25th percentile) and 25% (75th percentile) with a median of 22.5%.

As a practical matter, this means you should be able to get a 1/5th or even a 1/4th royalty, especially if you’ve got a large tract or particularly good minerals. There are obviously limitations and risk to this, however, since you run the risk of being forced pooled in certain states. (Consult an attorney to better understand your state’s pooling regime and how that should affect your negotiating strategy).

Historical Lease Royalties

Many people are conditioned to expect leases with 1/8th royalty (12.5%) because that was the historical practice. But almost no leases are signed at 1/8th royalty anymore. As you can see, the average lease royalty has been climbing over time across all states the states we looked at:

Graph Showing Average Oil and Gas Lease Royalty (By State)

Even Colorado, a state historically characterized by very low lease royalties, has seen big jumps since the start of the shale revolution (~2010).

In part, that’s because mineral owners are getting more savvy and operators are facing more competition, but also it’s because the quality of wells has gone up so dramatically since ~2010, as measured by the well’s peak oil production:

Graph Showing Peak Oil by State

(Note: The approve graph doesn’t account for gas production, which is why gas-heavy wells in the Haynesville-Cotton Valley areas of Louisiana do not seem to be improving).

Now you know!